The Challenges Of Tax Filing While Being Abroad

That is, any American who filed for an extension is now buckling down to prepare his 2018 tax return… myself included.

One related topic that has been generating lots of questions for me, both during last week’s Retire Overseas Conference in Houston and in my inbox lately, is foreign disregarded entities. Even professional tax-filers seem to be confused as to how these work.

One reader wrote this week to say his CPA doesn’t have any idea what form to use to report a disregarded entity. While that may seem scary, it’s not uncommon. Most CPAs and other U.S. tax-preparers have limited or zero experience with anything “offshore.”

In fact, this reader may not need to file to elect a disregarded entity; it wasn’t clear in his inquiry if he even has an offshore entity. He bought a piece of property in another country. If he holds title to the property in his own name, then he has no additional IRS forms to file. Any rental income from the property should be reported on a 1040 Schedule E form, just as you would report U.S. rental income.

If the reader did set up an offshore entity to hold his property overseas, then, yes, he has additional filing requirements.

The first form required in this case is 8832. This is the form to use to elect for an entity to be disregarded. This means that the entity won’t be taxed separately from its owner; all income flows through to the entity owner.

Unfortunately, a long list of foreign entities can’t be disregarded, including most local corporations in foreign jurisdictions. The instructions for filing Form 8832 include a complete list of all foreign entities that cannot be disregarded.

If you have a local corporation holding title to a piece of foreign property that can’t be disregarded for U.S. tax purposes and the property generates passive income, you can find yourself with an unnecessary and expensive tax burden. The particulars of how this works are too complicated to go into here. Suffice to say that you want any passive real estate income generated offshore to come into a disregarded entity.

Form 8832 is the form to elect to disregard the entity. In addition, you’ll need to file Form 8858 annually. It’s on Form 8858 that you detail the income, expenses, assets, and liabilities of the entity. It’s a straightforward three-page form that you file with your 1040.

In addition, you may need to file Form 8938.

An offshore entity qualifies as an offshore financial asset. If the value of your offshore entity breaks the filing threshold—which is US$50,000 for an individual living in the United States and US$200,000 for an individual living outside the States (and double those amounts for married couples filing together)—then you must report that fact on an 8938.

If the single entity holding your offshore property is your sole foreign financial asset, then that’s the only information to be included on Form 8938. However, once you reach the reporting threshold, all foreign financial assets must be detailed on the form, including any foreign bank accounts… even if you don’t meet the threshold for the foreign bank account report (FBAR) FinCEN 114.

At this point, your head may be swimming. As I said, even many professional tax-preparers struggle with this topic. In fact, it’s not that complicated. You just need to be sure to connect all the dots. It’s easier with help.

The challenge is finding help that’s actually helpful.

Some Americans I know with investments, assets, bank accounts, etc., offshore work with two tax professionals—the one they’ve always used for their tax stuff back home and a second guy whose expertise is offshore taxes for Americans. That can be redundant, as most offshore tax guys are familiar with onshore tax issues, too. It’s the reverse that isn’t generally true.

I do my own taxes every year. If I didn’t, the guy whose help I’d seek is named Vincenzo Villamena. Vincenzo joined me on stage last week in Houston for the panel discussion on taxes for the American abroad. If you weren’t in the room to meet him in person, you can contact him directly here.

Lief Simon